DERIVATIVES AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2012

DERIVATIVES AND HEDGING ACTIVITIES

DERIVATIVES AND HEDGING ACTIVITIES

As a multinational company we are exposed to market risks, such as changes in interest rates, currency exchanges rates and commodity prices.

For detailed information regarding the Company’s hedging activities and related accounting, refer to Note 13 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

In the second quarter of 2012, the Company added zero-cost collar option contracts to its portfolio to manage its exposure to U.S. dollar / Brazilian real exchange rates. These zero-cost collar instruments qualify as cash flow hedges of certain forecasted transactions denominated in U.S. dollars. The effective portion of the changes in fair value of these instruments is reported in Accumulated Other Comprehensive Income (AOCI) and reclassified into earnings in the same financial statement line item and in the same period or periods during which the related hedged transactions affect earnings. The ineffective portion is immediately recognized in earnings.

The notional amounts of qualifying and non-qualifying financial instruments used in hedging transactions were as follows:

In millions	September 30, 2012		December 31, 2011
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts (Sell/Buy; denominated in sell notional): (a)
British pounds / Brazilian real – Forward	19		26
European euro / Brazilian real – Forward	18		16
European euro / Polish zloty – Forward	154		233
U.S. dollar / Brazilian real – Forward	300		344
U.S. dollar / Brazilian real – Zero-cost collar	18		—
U.S. dollar / European euro – Forward	—		13
Natural gas contracts (in MMBTUs)	—		3
Derivatives Not Designated as Hedging Instruments:
Embedded derivative (in USD)	150		150
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (b)
Indian rupee / U.S. dollar	276		904
Thai baht / U.S. dollar	225		—
U.S. dollar / Turkish lira	56		—
Interest rate contracts (in USD)	150	(c)	150	(c)

(a) These contracts had maturities of 3 years or less as of September 30, 2012.

(b) These contracts had maturities of 1 year or less as of September 30, 2012.

(c) $150 million floating-to-fixed interest rate swap notional offsets the embedded derivative.

The following table shows gains or losses recognized in AOCI, net of tax, related to derivative instruments:

	Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)
	Nine Months Ended September 30,
In millions	2012			2011
Foreign exchange contracts	$	14		$	(47	)
Fuel oil contracts	—			2
Natural gas contracts	(1		)	(4		)
Total	$	13		$	(49	)

During the next 12 months, the amount of the September 30, 2012 AOCI balance, after tax, that will be reclassified to earnings is a loss of $12 million.

The amounts of gains and losses recognized in the consolidated statement of operations on qualifying and non-qualifying financial instruments used in hedging transactions were as follows:

	Gain (Loss) Reclassified from AOCI into Income (Effective Portion)												Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
	Three Months Ended September 30,						Nine Months Ended September 30,
In millions	2012			2011			2012			2011
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts	$	(4	)	$	(2	)	$	(10	)	$	10		Cost of products sold
Fuel oil contracts	—			1			—			4			Cost of products sold
Natural gas contracts	—			(5		)	(7		)	(15		)	Cost of products sold
Total	$	(4	)	$	(6	)	$	(17	)	$	(1	)

	Gain (Loss) Recognized in Income														Location of Gain  (Loss) In Consolidated Statement of Operations
	Three Months Ended September 30,							Nine Months Ended September 30,
In millions	2012			2011				2012			2011
Derivatives in Fair Value Hedging Relationships:
Interest rate contracts	$	—		$	(17	)		$	—		$	(10	)		Interest expense, net
Debt	—			17				—			10				Interest expense, net
Total	$	—		$	—			$	—		$	—
Derivatives Not Designated as Hedging Instruments:
Electricity contact	$	1		$	—			$	(2	)	$	—			Cost of products sold
Embedded Derivatives	(1		)	(1		)		(3		)	(2		)		Interest expense, net
Foreign exchange contracts	—			(9		)	(a)	(1		)	(16		)	(a)	Cost of products sold
Interest rate contracts	5			1				17			2				Interest expense, net
Total	$	5		$	(9	)		$	11		$	(16	)

(a) Premium costs of $5 million in connection with the acquisition of APPM are included in Restructuring and other charges in the accompanying consolidated statement of operations.

The following activity is related to fully effective interest rate swaps designated as fair value hedges:

	2012						2011
In millions	Issued		Terminated		Undesignated		Issued			Terminated			Undesignated
Third Quarter	$	—	$	—	$	—	$	—		$	464	(b)	$	—
Second Quarter	—		—		—		100		(a)	—			—
First Quarter	—		—		—		100		(a)	—			—
Total	$	—	$	—	$	—	$	200		$	464		$	—

(a) Fixed-to-floating interest rate swaps were effective when issued and were terminated in the third quarter of 2011.

(b) Terminations of fixed-to-floating interest rate swaps were not in connection with early debt retirements. The resulting $27 million gain was deferred and recorded in Long-term debt and is being amortized as an adjustment of interest expense over the life of the respective underlying debt through June 2014, March 2015 or March 2016.

Fair Value Measurements

For a discussion of the Company’s fair value measurement policies under the fair value hierarchy, refer to Note 13 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period.

The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet:

Fair Value Measurements

Level 2 – Significant Other Observable Inputs

	Assets						Liabilities
In millions	September 30, 2012			December 31, 2011			September 30, 2012			December 31, 2011
Derivatives designated as hedging instruments
Foreign exchange contracts – cash flow	$	5	(a)	$	—		$	30	(d)	$	53	(f)
Natural gas contracts – cash flow	—			—			—			10		(e)
Total derivatives designated as hedging instruments	$	5		$	—		$	30		$	63
Derivatives not designated as hedging instruments
Embedded derivatives	2		(b)	5		(c)	—			—
Foreign exchange contracts	—			1		(b)	1		(e)	—
Interest rate contracts	—			—			2		(e)	5		(g)
Total derivatives not designated as hedging instruments	$	2		$	6		$	3		$	5
Total derivatives	$	7		$	6		$	33		$	68

(a) Includes $3 million in Other current assets and $2 million in Deferred charges and other assets in the accompanying consolidated balance sheet.

(b) Included in Other current assets in the accompanying consolidated balance sheet.

(c) Included in Deferred charges and other assets in the accompanying consolidated balance sheet.

(d) Includes $25 million recorded in Other accrued liabilities and $5 million recorded in Other liabilities in the accompanying consolidated balance sheet.

(e) Included in Other accrued liabilities in the accompanying consolidated balance sheet.

(f) Includes $32 million recorded in Other accrued liabilities and $21 million recorded in Other liabilities in the accompanying consolidated balance sheet.

(g) Included in Other liabilities in the accompanying consolidated balance sheet.

Credit-Risk-Related Contingent Features

Certain of the Company’s financial instruments used in hedging transactions are governed by industry standard netting agreements with counterparties. If the lower of the Company’s credit rating by Moody’s or S&P were to drop below investment grade, the Company would be required to post collateral for all of its derivatives in a net liability position, although no derivatives would terminate. The fair values of derivative instruments containing credit risk-related contingent features in a net liability position were $28 million and $67 million as of September 30, 2012 and December 31, 2011, respectively. The Company was not required to post any collateral as of September 30, 2012 or December 31, 2011. For more information on credit-risk-related contingent features, refer to Note 13 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.